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Trading carries a high level of risk to your capital and can result in losses that exceed your deposits. It may not be suitable for everyone so please ensure you fully understand the risks involved. When trading this pattern, it advisable to place your stop loss order above the preceding swing high.


The pattern consists of two candlesticks, where the first one is bullish while the second one is bearish. You may read that the dark cloud cover is good to pick market tops, that is false. Traders would be better served looking for signs of exhaustion of the uptrend and look for this pattern during a rally in price to take another trade short. Therefore, traders use other technical analysis to exit the short trade.

resistance levels

Traders can rely more on the pattern if the second candlestick ends below the midpoint of the first candlestick. The deeper the second candlestick penetrates, the more important it becomes. It also becomes more important if the two candlesticks that form the pattern are Marubozu candlesticks, having no lower or upper shadows.

Trade Candlestick Patterns with Top Forex Brokers

Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts. The Bearish Engulfing Pattern can be viewed as a more bearish formation, it completely rejects the gains of Day 1 and usually closes below the lows of Day 1. If the volume is high on both candles relative to previous candles, the reversal is more likely to occur.

A dark cloud cover must have a red body opening above the high of the previous green body as well as closing below the green body’s center. If entering short, the initial stop loss could be placed above the high of the bearish candle. Following the confirmation day, the stop loss could be dropped to just above the confirmation day high in this case. Traders would then establish a downside profit target, or continue to trail their stop loss down if the price continues to fall.

What Does the Dark Cloud Cover Forex Pattern Mean?

As you can see from the above, the price was moving steadily higher forming a nice uptrend. Towards the upper right section of the chart you can see the dark cloud cover pattern within the magnified area. Notice the first candle is a green candle, which represents a bullish close. The price action at the start of the next candle gaps higher, and then starts to selloff, pushing prices lower below the halfway point of the body of the first candle. These conditions confirm that the structure is indeed a dark cloud cover pattern. These are just some of the technical methods that can be used alongside the dark cloud cover formation.

Its lower shadow and small section of the body is usually below the lower shadow of the first bearish candlestick. It’s imperative to never confuse the dark cloud for the bearish engulfing pattern. While they both appear to be similar, they translate into entirely disparate market conditions. This pattern is most reliable when the engulfing candle’s open is far above the engulfed candle’s close, and the engulfing candle’s close far below the open of the engulfed candle.

How to trade when you see the Dark Cloud Cover pattern?

For example, if the Stochastics is below the 30 level, it can be a sign of an oversold condition, and traders could look to exit the short trade. It stands to reason that when the pattern forms the reversal happens. When you zoom in you see the smaller patterns like the darkcloud coverpatterns forming. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances.

The candlesticks’ opens and closes seen during a bearish engulfing pattern are not reliable price targets, and it’s essential to use other indicators to confirm the trend reversal. When there is a bullish trend going on in the stock market, then you get to see a bullish candlestick. On the second day also the gap up is opened according to the market trend.

Majority of the traders consider that the dark cloud cover candlestick is only useful when it occurs at the end of an uptrend. With the trade examples shown above, we used the volume indicator to help us identify the dark cloud cover forex patterns that may lead to the highest-probability reversals. Other indicators such as the MACD or RSI can also be useful and perhaps motivate you to explore other ways to help you trade this pattern.

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Similarly, we will draw another line at the top of the height of the candle. So our bias is if the price reverse and moves above the high of the dark cloud cover then we do not want to be in this trade. In Forex, a gap up to the second candle’s open is not necessary. The extreme liquidity of the Forex market ensures that there are rarely gaps in price from one candle to another.

Things to remember when trading

Additionally, there was a range breakout, though with a nominal value, which added to the possibility of the price reversal. Multiple candlestick patterns are often confused with the dark cloud cover. It’s essential to understand the differences when using candlestick pattern technical analysis. Dark Cloud Cover Bullish Mean Reversion Trade setup on the Markel November 11th, 2020 daily chartPrice is in an uptrend as it’s above the fifty-day simple. We see a long bullish candle followed by a gap up and bearish candle that closes below the midpoint of the first candle. But before we cover the best dark cloud cover trading strategies, let’s learn how to identify this pattern on our candlestick charts.

candlestick chart

Essentially the new highs of the past uptrend have been rejected, the bears have had enough. Traders confuse the Dark Cloud with the Bearish Engulfing Pattern. Both patterns suggest a bearish reversal, but the Dark Cloud defines an ideal entry-level because of the higher close of the bearish candle against the bullish candle. The Dark Cloud Cover is a classic bearish reversal pattern, which appears at the end of an uptrend. After definite increases, the second candle of the pattern opens creating a price gap, however, closes below the midpoint of the previous candle, proving the market weakness. The Dark Cloud Cover pattern is a candlestick pattern that signals a potential reversal to the downside.

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The Dark Cloud Cover is among the most popular candlestick patterns. Its first candle has to be a white candle appearing as a long line . The second candle is a black candle appearing as a long line . Candlestick analysis is an essential part of technical analysis.

  • Some patterns work better with stronger trends, while others work better with weaker trends.
  • In the image below, you can see a nice dark cloud cover pattern that signaled a major reversal.
  • Therefore, this event would have triggered the exit on the trade closing us out with a profitable position.
  • Candlestick trading techniques are very popular with price action traders.
  • Therefore, traders use other technical analysis to exit the short trade. r state that this pattern is useful only if the rise in price is seen overall. The pattern is also characterized by white and black candlesticks that feature real long bodies and also have short or no shadows. A dark cloud cover pattern is voided if a future candlestick closes above the high of the dark cloud cover pattern. The first candle is a trending white candle and the second is the reversal black candlestick. Like all reversal patterns, the dark cloud cover is a guarantee of nothing.

It’s so important to be able to see the big and the small patterns when going to place a trade. You can see in the charts posted, that the bearish reversal didn’t happen as soon as a dark cloud cover formed. Looking at things like moving average lines,RSIand MACD can help to determine the direction of a stock. Moving average lines act as support levels when candlesticks are trading above them.

The are taken seriously when they appear after a significant uptrend in prices of a stock. If the volume is high during the formation of this candle, there are more chances of the reversal to take place. How to trade using Dark Cloud CoverStoploss can be placed above the recent high and the initial target level can be set at key levels or recent areas of support/resistance. To me, a dark cloud cover shows momentum to the downside and my trading plan has a momentum variable built in. With true momentum in a bearish context, I want to get short as soon as possible to catch the possible increase in momentum such as we see on this chart. Self-confessed Forex Geek spending my days researching and testing everything forex related.

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